高通 (QCOM) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the QUALCOMM third quarter conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded July 20th, 2005. The playback number for today's call is 1-800-633-8284. International callers, please dial area code 402-977-9140. The playback reservation number is 21245566.

I would now like to turn the call over to Bill Davidson, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Altman, Dr. Sanjay Jah and Bill Keitel. An Internet presentation and audio broadcast accompanies this call, and you can access it by visiting www.qualcomm.com.

During this conference call, if we use any non-GAAP financial measures, as defined by the SEC and Regulation G, you can find the required reconciliation to GAAP on our website. I would also direct you to our 10-Q and earnings release, which were filed and furnished respectively with the SEC today, and are available on our website.

We may make forward-looking statements relating to our expectations and other future events that may differ materially from QUALCOMM's actual results. Please review our SEC filings for a detailed presentation of each of our businesses and associated risks, and any other important factors that may cause our actual results to differ from these forward-looking statements.

Pro forma revenues were $1.36 billion in the third fiscal quarter, up 2% year-over-year and down 1% sequentially. Third fiscal quarter pro forma net income was $465 million, down 4% year-over-year and 5% sequentially. Diluted earnings per share were $0.28, down 3% year-over-year and sequentially. Third fiscal quarter pro forma free cash flow, defined as net cash flow from operating activities less capital expenditures, was $368 million, down 6% year-over-year and was 27% of revenue.

And now it is my pleasure to introduce QUALCOMM's CEO, Dr. Paul Jacobs.

Thanks, Bill. And good afternoon, everyone. It's certainly an honor to be speaking to you today as QUALCOMM's CEO. I want to start by thanking Irwin and Tony for their contributions to the Company, and I really want to wish Tony all the best in his retirement.

The transition has gone very smoothly, and I know that the entire management team shares my excitement for the many opportunities we have in front of this great Company. All of us have been working together for a long time, and together we are focused on executing our road maps to bring innovative new technologies, products, and services to market in cooperation with our partners.

Let me start also by saying that we are very pleased to be able to raise the midpoint of our fiscal year pro forma earnings guidance by $0.02. The primary reason for the increase is attributable to greater shipments of higher priced WCDMA handsets. The average selling price for the total CDMA handset market rose to approximately $231 for sales in the March quarter. That was primarily due to regional mix.

Since I have taken on the CEO role, I have been visiting wireless operators around the world, and I am extremely optimistic about the future of 3G in all geographies. The markets where technology competition exist, like Japan and the United States -- in markets where technology competition exist, like Japan and the United States, we are experiencing dramatic growth in 3G. In China, of course, we continue to wait for the issuance of the third-generation licenses, and it is very difficult to predict when this event will occur, but it will occur.

In Europe, handset pricing has fallen, enabling operators to address a larger portion of their subscriber base with WCDMA, and we remain extremely encouraged by the traction that our MSM6250 is getting with OEMs and operators. There are now 16 commercially available devices based on the MSM6250 chipset solution.

As we build on consumer demand for increasing functionality, QUALCOMM is designing and delivering new enhancement to CDMA2000 and WCDMA. The enhanced multimedia and convergence platform chipsets that are already sampling to customers, support the next step in the migration of CDMA2000 and WCDMA as we lead the industry with DO Rev A and HSDPA.

Many of the enhancements we originally developed for EV-DO continue to be transferred to WCDMA. These include support for higher data rates to and from the phone with HSDPA and HSUPA, enhanced multimedia with packet voice and video for video telephony, and multimedia broadcast muticast service or MBMS, as well as the fundamental capacity and quality gains with equalizers, received diversity and interference cancellation.

Clearly we're spending significantly on research and development, but these innovations enable us to maintain and extend our market leadership. And we are not just working on the high end, recognizing that a significant number of the next billion subscribers will come from markets with low per capital GDP. We continue to research, develop and implement new techniques specifically directed at driving down costs for entry-level phones.

Among the key initiatives for driving down costs for both CDMA2000 and WCDMA handsets are low-power process technologies for MSM chipsets, RF CMOS for RF chipsets, and our SC chipset lineup, which integrates radio and power management with the base band.

Turning to the application side, our fifth annual BREW developers conference served as an opportunity to highlight the global success and wide spread adoption of wireless data. We are continuing to evolve the BREW system through joint work with BREW operators, developers and device manufacturers. And we are demonstrating the system's flexibility to operators who are considering BREW for their software platforms. The BREW environment is extensible and let's developers and operators add their own functionality while maintaining the security of the system.

Based on our acquisition of Trigenics, we've enhanced the system with BREW uiOne. This enables operators to easily develop and deploy user interfaces that simplify their subscribers' access to the services which differentiate them from their competitors. We are excited about our agreement with the first U.S.-based operator ALLTEL, and there are two other major operators that have not publicly announced their selection of uiOne.

We are pleased with the progress we are making on MediaFLO USA, and are on schedule to support our fourth-quarter 2006 launch. Recently the FCC has approved request to shut down analog TV stations on channel 55 in Orlando and Seattle, and our request for New York City is currently in process. This adds two more to the long list of cities where spectrum will be available as we launch MediaFLO .

We have also announced the intent to standardize the FLO technology with the formation of the FLO forum. This is an organization comprised of industry operators, broadcasters, content providers, and vendors that are committed to a standardization of QUALCOMM's FLO technology. And our MediaFLO chipset program remains on schedule. The MBD1000 chipset, which will initially be available with the MSM6550 will begin sampling in the fourth quarter of calendar 2005 and will integrate eventually with CDMA2000 and WCDMA chipsets.

MediaFLO is an example of how QUALCOMM has evolved to be a complete wireless technology company. We are committed to using the technology that best meets the requirement of the applications consumers are demanding, and we think this concept will become increasingly commonplace. Heterogenous networks operating in conjunction with each other, affording a wide variety of service, all accessed by subscribers on their wireless devices. Next evolution in wireless will be less about competing technologies and more about how complementary technologies will work together in a seamless fashion.

QUALCOMM continues to invest in research and development to introduce new innovations to our industry in a variety of areas. We integrate new technologies into our product portfolio to enable our partners to introduce new services, or improve the performance of their existing services, to improve their economics and reduce the time to revenue generation.

3G road map includes 3G radio access network enhancements to support a variety of broadband and sensitive application, such as mediacasting, Voice over IP, video telephony and push to talk, with increased data throughputs, lower latencies, increased capacities and greater affordability. And many of these continuing innovations touch upon the value chain of multiple industries, whether it is mobile telecommunications, information technology, consumer electronics or entertainment.

QUALCOMM is also very active within several standard bodies, such as 3G PP, 3G PP2, [inaudible], OMA and others to ensure that these innovations are universally implemented to support economies of scale and interoperability with existing and future mobile communication services to preserve ongoing investments. Working together with our partners, we have a future road map that is robust, evolutionary, and capable of delivering most any mobile application or service desired by a consumer or enterprise in the marketplace.

To close, I am very pleased to report that we have repurchased approximately $1 billion of the Company's stock since March of 2005. We have now completed one-half of our $2 billion stock repurchase program. We continue to believe in returning capital to our investors through dividends and select stock repurchases.

I would now like to turn the call over to Steve Altman.

Thank you, Paul. And good afternoon, everyone. I will take a few moments to highlight a number of important achievements in our QTL, QIS, and QWBS businesses. First in QTL, during the quarter, we signed four subscriber unit license agreements with Chinese manufacturers covering WCDMA. This increases the total number of WCDMA licenses with Chinese manufacturers to five. In addition to the previously announced interim license agreement. Each of these agreements are at QUALCOMM's standard royalty rates for WCDMA handsets.

I am also pleased to report that WCDMA royalties have grown to represent approximately 36% of our royalties for the June quarter, compared with approximately 32% for the March quarter. This increased percentage is primarily as a result of increased sales of WCDMA handsets in Japan.

With more than 3,900 U.S. patents issued and applied for, our patent portfolio continues to expand. Although it is widely recognized that our patents broadly apply to CDMA2000, WCDMA, TDS-CDMA and other CDMA systems, our research efforts extend beyond CDMA. As a result, we are confident that we also have a strong patent position in other technologies, such as GPRS, EDGE, OFDM, OFDMA, and 802.11 to name a few.

We, of course, look to continually strengthen our portfolio in areas outside of CDMA through internal R&D or acquisitions. For example, last year we acquired Vesuvius, Inc. to obtain its patents related to the delivery of multimedia content to wireless devices. And we acquired Iridigm to gain access to its pioneering display technology. Another example, in 2000, we acquired Snap Track which holds a valuable portfolio of patents related to location-based services that are applicable to many types of cellular systems.

Turning to QIS, useful and entertaining BREW applications are translating directly into revenue gains for the mobile market place. In June, we reported that BREW publishers and developers have earned more than $350 million from the sales of wireless applications and services, a 75% increase from what we disclosed in October of 2004.

We announced our deliveryOne suite of products, which includes a global distribution agreement with ELATA to launch the content delivery system. deliveryOne offers operators a choice of flexible, back-end solutions that enable them to remain committed to their existing device portfolio, and continue evolving their lineup to include handsets with new capabilities and more powerful service options, such as 3-D gaming and uiOne based on the BREW platform.

Electronic Arts, the world's leading independent publisher and developer of interactive entertainment software, announced an agreement to publish wireless games developed for the BREW solution. And Macromedia announced an agreement with QUALCOMM to develop commercial flash-based services using the BREW solution. These companies join an ever increasing list of distinguished software developers who are writing exciting applications for the BREW platform.

In QWBS, the T2 Untethered TrailerTRACS solution continues to perform strongly meeting shipping goals and appealing to new customers. Since August of 2004, nearly 42,000 terminals have been shipped. In addition, QWBS shipped nearly 13,800 satellite-based systems in the third quarter, compared to approximately 8,800 in the second quarter of fiscal 2005. This brings cumulative total satellite-based systems shipped worldwide to nearly 556,000.

I would now like to turn the call over to Sanjay Jah.

Thanks, Steve. And good afternoon, everyone. Here are some updates on the QCT business. Revenue of $766 million for the quarter was driven by continued demand for CDMA2000 1X products, including a 24% increase in 1xEV-DO volume quarter over quarter, and a substantial demand for wideband CDMA products, including a doubling of wideband CDMA MSM volume for the second consecutive quarter. The MSM6100, MSM6500, and MSM6550 integrated multimedia chipsets are tracking strong volumes in Korea and Japan and ramping down in the U.S. as Verizon and Sprint extend their deal rollouts.

LG launched their FDMV [ph] phone without a co-processor, instead relying solely on the multimedia processing capabilities and integrated 225 Megahertz microprocessor of our MSM6550 chipset. Our investments over the last two years with our multimedia and enhanced multimedia platform chipsets are paying off with more than 30 EV-DO phones currently launched based on MSM6500 and many additional MSM6550 phones designed for Japan, Korea and the Americas.

We are very pleased with the great deal of traction QCT wideband CDMA solutions are receiving from customers as the year-end selling season approaches. The MSM6250 is gaining stronger acceptance in both Asia and in Europe. We have also completed extensive [inaudible] testing of our HSDPA solution to enable MSM6275-based handsets and data cards to be launched this year. In September quarter, we expect to start volume shipment of our -- of our MSM6275 chipset.

In Japan, Toshiba has launched a phone based on our solution for Vodafone KK. Samsung V500 and V300 have launched at PMN Portugal, Telecom Italia Mobile, Orange, and multiple vodaphone markets in Europe. LG recently began selling its UA210 phone with Orange. Today, there are more than 16 commercially available devices based on our wideband CDMA chipset solution, with over 30 additional active designs expected for launch by the end of the calendar year and the first half 2006.

In the June quarter, downward pressure on our chipset ASPs, in part caused by ramping demand for the MSM6,000 and 6025 CDMA solution was offset by favorable changes in our product mix, attributable to increasing volume for 1xEV-DO wideband CDMA and higher multimedia capable chipset volumes. For the second quarter, we again expect a sequential increase in our ASPs. This increase is expected to keep our ASP at the same level or marginally higher than the ASP in the fourth quarter of fiscal 2004.

In line with our guidance, our operating margin for the June quarter was approximately 24% of revenue, up from 21% last quarter. For the September quarter, we expect another sequential increase in QCT operating margin. We continue to see increasing demand for our solutions. For the current September quarter, we expect to ship between 38 and 40 million MSM chips.

And now I will turn the call over to Bill Keitel for the financial overview.

Thank you, Sanjay. Good afternoon, everyone. I am pleased to report QUALCOMM pro forma third-quarter results met or exceeded our prior guidance, were positively impacted by a growing base of WCDMA subscribers. Pro forma June quarter revenues increased 2% year-over-year, and diluted earnings per share were $0.28 exceeding our prior guidance of $0.24 to $0.26, again, on the strength of WCDMA shipments in Japan. By the way, as many you know, our pro forma reporting excludes the QSI segment, and reports our revenues as if the new method of royalty recognition had been in effect for all of 2004.

QTL reported royalty revenues on approximately 43 million CDMA and WCDMA handsets sold worldwide in the March quarter compared to approximately 38 million units in the same period last year. QCT shipped approximately 36 million MSM phone chips compared to approximately 35 million in the year-ago quarter.

I will now mention several highlights in our fiscal third-quarter results. First, we reported $0.33 diluted earnings per share on a GAAP basis. QSI reported earnings of $0.05 per share on the strength of realized investment gains. Due to these realized additional capital gains, we now expect to utilize additional capital loss carry-forwards, which also benefited QSI results. As a reminder, we include the operating expenses related to the development of our MediaFLO USA operator business in the QSI segment. And this treatment is consistent with our intent to ultimately divest the business by spinning it off to our stockholders.

Second, we continue to be active in returning capital to our stockholders. In the June quarter, we distributed $147 million in dividends, and repurchased approximately 20.9 million shares for approximately $723 million. Since our $2 billion buyback authority was announced on March 8th of this year, we have repurchased more than 27 million shares for a total investment of approximately $953 million. We have also sold two put options for an additional 11.5 million shares, which, if exercised, would amount to an additional net investment of $389 million.

Third, during the June quarter, we made an election to compute our California tax on the basis of our U.S. operations only, which resulted in a $38 million tax benefit, a portion of which related to fiscal 2004. The pro forma June quarter presentation, we excluded the $0.01 earnings per share of this tax benefit attributable to fiscal 2004.

Fourth, we continue to invest in our businesses, and we are pleased to see the benefits of those investments reflected in the many innovative product releases from our different business segments. Our operating expenses, which includes R&D plus SG&A, increased approximately 29% in the first three quarters of fiscal 2005 compared to the same period of last year. This growth continues to be driven primarily by R&D.

Fifth, QCT's operating margin increased to 24% in the June quarter, up from 21% in the March quarter, driven by favorable product mix, including increased shipments of EV-DO and WCDMA MSMs.

Six, QTL reported a 91% operating margin in the June quarter. We estimate the WCDMA -- the WCDMA royalties increased to approximately 36% of total royalties reported by licensees for shipments in the March quarter, up from approximately 32% last quarter and approximately 25% in the same period last year. Of the $448 million in QTL revenues for the June quarter, 29 million represented intercompany royalties, license fees were 18 million, and royalties from licensees were 401 million.

Worldwide WCDMA handsets shipped in the March quarter were approximately 43 million units, above our 40 to 42 million estimate provided in April. Primarily driven by strength in Japanese WCDMA shipments. The March quarter average selling price of CDMA phones was approximately $231, compared to $207 in the December quarter and our prior estimate of $215 for the March quarter. ASPs on a region-by-region basis continue to track closely to our expectations.

I'll now turn to our forward-looking guidance. We estimate that licensees shipped approximately 43 to 45 million CDMA handsets in the June quarter, which in turn will be the basis for our September quarter royalty revenues. We estimate the average selling price was approximately $215 million per unit, reflecting a shift in regional handset mix as compared to the prior quarter, including sequential growth in shipments to North America, India, and Europe, and a sequential decrease in Japan and South Korea.

We expect fourth-quarter QUALCOMM pro forma revenues to be approximately $1.43 to $1.53 billion and pro forma diluted earnings per share of approximately $0.29 to $0.31. We anticipate shipments of approximately 38 million to 40 million MSM phone chips during the September quarter compared to 36 million units shipped in the June quarter, a sequential increase including continued growth of WCDMA and EV-DO MSMs.

We estimate pro forma operating expenses, again, R&D and SG&A combined, for the fourth quarter will grow approximately 7 to 11% sequentially. For fiscal 2005, we estimate pro forma revenues to be approximately $5.55 to $5.65 billion, up approximately 10 to 12% year-over-year. We anticipate pro forma diluted earnings per share of $1.13 to $1.15, an increase of approximately 6 to 7% over fiscal 2004 and a midpoint of $0.02 high are than our prior guidance.

We now estimate calendar 2005 CDMA handset shipments of 198 million to 208 million units, a reduction of approximately 5% from our prior estimate. Using the midpoint of 203 million units, this is approximately 45 million WCDMA handsets and approximately 158 million CDMA2000 handsets. Our current handset guidance reflects a lower expectation for CDMA2000 handset shipments in China and lower-than-expected WCDMA handset shipments in Europe; however, we continue to see a healthy rate of WCDMA unit growth in Europe for the second half of 2005 and into 2006. Due in part by the trends we see in WCDMA handset pricing.

Our Investor Relations website has a detailed breakdown of the handset shipment estimate by region and technology. Based on the current business outlook, we estimate that handset ASPs will average approximately $215 for fiscal 2005 compared to approximately $205 for fiscal 2004.

In closing, we are pleased with how our Company is executing across all business groups. The growing adoption of CDMA-based 3G technology across many consumer segments and regions around the world continues to drive strong financial results for our Company. Moreover, our WCDMA and EV-DO MSM shipments are ramping well, a positive leading indicator for our stockholders.

That concludes my comments. I will now turn the call back to Bill Davidson.

Thank you, Bill. Before we go into our question-and-answer session, I'd like to remind our participants that our goal is to address as many questions as possible. Therefore, I would like to ask each of you to limit yourself to one question. And we are ready for questions, Operator.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Tal Liani at Merrill Lynch. Please proceed with your question.

Hi. My question is related to handset shipment, the chip shipment. The question is if you assume about 44 -- sorry 39 million MSM chips for 4Q, and then I look at the estimates for next quarter for handset shipment and I assume that WCDMA chip shipment is negligible number, maybe a million unit of your estimate. Then your chip shipment almost exceeds your CDMA handset shipment. We can estimate the CDMA and the WCDMA. So the issue is, do you expect the chip shipment really to exceed handset shipment, do you expect to build some inventory? Because in the last few quarters, you did say that you worked the inventories down. Thanks.

Tal, this is Bill Keitel. I will try to answer your question here. First on the WC -- your assumption on WCDMA chips, I will just say that you are quite a bit low there. We are not going to disclose a specific number, but your number is quite low.

In terms of the channel inventory, I've seen a slight downward trend in the last quarter. I still see we are within that 15 to 20-week band that we have seen now for some time. More to the midpoint of that band and a level that I am comfortable. I am not expecting major ups or downs in reaction to the level of channel inventory that's out there.

Did you disclose the WCDMA handset shipment this quarter?

No, we don't.

Okay.

Our next question comes from the line of Ed Snyder at Charter Equity. Please proceed with your question.

Thank you very much. Obviously, you mentioned you signed up a few more of Chinese OEMs, and it looks like we are seeing -- the reports that we are getting out a lot of the other OEMs have moved in the industry overall for ASPs to decline. Not seeing that as acute. What are we to expect given that we will see a larger mix of probably CDMA in some of the emerging markets for ASPs beyond next quarter, especially with regard to some of the EV-DO and WCDMA handsets that you are selling now. Is it reasonable to expect that we should see ASPs decline more rapidly than we have historically? And what impact are you projecting for that on your royalties in the out year.

Ed, Bill Keitel again. I would say, Ed, that within the handset prices, the estimated actuals provided and then our guidance here for our September quarter. There are very low prices selling into the low-end markets. We believe China is getting some very low-cost phones, India and Latin America are probably the three more prominent markets. But within that average selling price that you are seeing, because there are so many feature-rich phones selling, it's -- it's not coming through in the average.

But I would add that I am expecting the -- the price of the low-end phones to get a bit lower in the coming quarter, but, again, the rate of -- of feature-rich phones that carriers and consumers are demanding is such that I think the ASP will only come down modestly for next quarter.

Our next question comes from the line of Brian Thompson at Goldman Sachs. Please proceed with your question.

Hi. I was wondering if you could talk a little bit about the progression of R&D over the next couple of quarter. It came in a little lighter than what we were looking for. And how do you guys see managing that R&D investment over the next couple of quarters? Thanks.

In general, we're slowing down a bit in terms of adding the number of new employees. We are also looking at putting some R&D into lower cost regions. So we are growing in India. We are starting to grow a little bit in China. So we are actually trying to manage the R&D investment now. Obviously, there is a build-up that happens just because of the number of employees that we brought on board, and so you will still see growth. But as you are seeing also, QCT's operating margins came up and a lot of that comes from the fact that we are selling the higher-end chipsets that we are building with this R&D investment. So I think the R&D investment has been well justified by that.

Thank you.

Our next question comes from the line of Wojtek Uzdelewicz at Bear Stearns. Please proceed with your question.

Thank you very much. In terms of -- if you can give us a little clarification in terms of your guidance, which is very explicit, but still one thing I want to clear. You talk about sequentially essentially not a lot of unit handset sales growth, and a little higher chipset sales, but still your earnings are expected to go up despite even ASPs going down. So I am just curious, can you give us a little bit sense -- do you expect operating margins for the chipsets to go up? And also in terms of royalties related to that. Would you expect those -- those royalties -- the rate of royalties to go up? Is that already -- because in the past you mentioned that some of the licensees -- some of the sharing of the royalties will expire. Are you starting to see effect of that?

And then just very -- just clarification very quickly. In a press release, there was $20 million in net realized gains. If I exclude that, I will get to about $0.27 in EPS. Is that correct?

Okay. Wojtek, first on the margin question, yes, we are looking for a very strong September quarter in QCT. We are looking for ASP on average to edge up just a bit. And -- and we are expecting the operating margin to improve sequentially next quarter. On the -- on the QTL side, we indicated a -- an increase in the number of phones that we expect we will be recording royalties on, although a slight decrease in the ASP, primarily because of the regional mix that we see the phones shipping into for the next quarter. But all in all, I would say it is a very positive outlook and stronger on the WCDMA and DO sides, both chips and phones.

So no change to the royalty rate at this point yet?

The royalty rate is the same licensee by licensee -- every licensee has the same royalty rate regardless of technology. So royalty rate, you shouldn't see fluctuation in.

Just to clarify. There's no -- there is no fluctuation in the royalty rate, and the -- the royalty rate per licensee is not changing as a result of the royalty sharing issue.

I am sorry, no, what I meant is -- you disclosed a couple of quarters ago that there is -- there are certain agreements that are expiring, and that -- because of that result that -- that royalty -- I am sorry the amount of the royalty you would be receiving is going to go up. I just was curious if that is already happening next quarter.

I understand what you are saying now, Wojtek. Yes, so we do have some royalty sharing agreements. One of those agreements ends at the end of this year and one ends next year. There is a very modest improvement to our September revenues for one of the agreements ending at the end of this fiscal year, but it is very modest.

Okay. Thank you.

Then to your question on -- on the gains. There are gains in QSI that relate to our venture investments, and then there are gains in the core business on our -- our cash portfolio relating to the various investments that we've made.

Thank you very much.

Our next question comes from the line of Christin Aramacost from SG Cowen.

I just wanted to follow up on Wojtek's question with respect to the royalty sharing. I think you had quantified the amount that you expected over the course of the next year, something in the range of like 330 to 360. I wanted to make sure I have that right. And I have a follow-up

Christin, that number is correct. I would just add that that was guidance that we gave last November, and we will update that this coming November.

Okay. But that's for royalties. That's for the fiscal 2006 period, correct?

Fiscal 2006. The -- the impact for fiscal 2006 of the end of royalty sharing.

Thank you. And when they look at your revised -- your revised handset shipments with the 203 being the midpoint, you mentioned you were seeing some pickup in India for WCDMA. I was wondering if you could give us an update on India in general.

I indicated that sequentially I expect more handsets to ship for the India market, but I -- I did not identify technology. I expect that, though, to be CDMA2000.

Thank you.

Thank you. Our next question comes from the line of Cody Acree at Legg Mason. Please proceed with your question.

Let me talk a little bit about what contribution you expect or at least maybe your initial indications of interest that you're getting in some of the products you featured in the press release, specifically the high-end dual CPU product and maybe also the lower-end integrated solution.

This is Sanjay. Taking the lower-end solution, the MSM6000 and MSM6025, particularly when combined with our RF CMOS solution has had incredible traction. We see over 50 handset designs either launched or going on based on those solutions, and one of the press releases we said we are migrating that low-end solution to Single Chip solution and we will sample that the first quarter next year, and in both -- in that solution also, we see tremendous interest from our customers, as well as carriers. Again, the purpose would be to enable our CDMA carriers to compete in the low-end business and go after the roughly billion new subscribers that we expect would -- would be available if we can enable them to have very low-cost handsets.

In terms of the high-end chipset, the 7500 that we sampled in June, we are seeing interest from probably five customers so far, and the interest ranges from high-end cell phones, as well as some PDA-like devices based on our solution. You may remember that 7500 has two microprocessors integrated, ARM9 for running the modem and ARM11 running at 400 Megahertz currently and then eventually toward next year migrating to a gigahertz processor. That solution is getting pretty good traction, though I expect that it will not impact our revenue significantly in next fiscal year.

Great, thank you.

Our next question comes from the line of Hasan Imam at Thomas Weisel Partners. Please proceed with your question.

Thank you. I have a question regarding the WCDMA market dynamics. First a clarification, you made a comment that WCDMA ASPs were up. Was that related to handsets or chipsets?

Handsets.

So if that's the case, then could you shed some color on the ASP dynamics, because I think one of the expectations or catalysts for the WCDMA market to ramp in the second half of '05 is that the WCDMA handset prices will come down. So we are we seeing kind of transient spike here in pricing?

What we saw was actually a regional effect so that the higher-end handsets coming out in the Japan market raise the ASP. We saw unexpected strength in the Japan market, but we do see the handset pricing coming down, and that's focused predominantly on Europe, where a number the operators want to take the lower priced handsets and actually go after the voice market. And so we do see that there's going to be some aggression there. We expect to see some aggression there in terms of operator pricing plans, and -- and that will coincide with the reductions in the handset pricing.

Okay, one last thing there. In terms of your guidance for units. It's come down pretty significantly from 55 to 45 now. LG pegged it at 40 million. Do you think there is risk of another let down?

Well, I -- Hasan, we always give you our best forecast. We said in the past that predicting new launches is -- has been one of our least accurate areas. I also noted that somebody today came out with a 50 million forecast. So, we do ours from the ground up. We are talking with the operators, and I feel confident about our 45. Having said that, there is a lot of new launches and new ramps in there, and the variability that I gave you in our total handset forecast. There are more around WCDMA than there there are CDMA2000.

Fair enough, thank you.

Our next question comes from the line of Tim Long at Banc of America. Please proceed with your question.

Thank you. Sanjay, I think you talked in the past about having some -- or seeing some $200 WCDMA phones by the end of the year. Can you just update us on that and do you expect that QUALCOMM will be the engine in any of these handsets?

Yes, I still expect that. In fact, I think I am confident that -- that QUALCOMM will be engine in at least two of those handsets. And in fact, I think -- I expect those handset prices will come down even more dramatically at the low end with low feature sets, and not the average selling price, but at the low end. They will continue to come down very dramatically.

Okay. Just as follow-on on your -- on your formal share goals of 50%. Any change to that given the Motorola Freescale that was a potential opportunity there. Does that change the pace of the level of investment or any view on the chipset market? Thanks.

We -- we are not increasing that guidance today. I think that -- that the Motorola announcement was not a surprise to us, and the reason it is relatively straightforward to see is if you have designed as many handsets as Motorola probably has designed for Freescale, it makes sense for them to continue to extend that relationship and make sure they have a supply agreement in place.

I don't believe that that means that they are still not looking for second source. I've always indicated that our ability to win that account will be a very difficult one. We continue to work on winning that account. But our ability to be very successful in wideband CDMA market also depends on being able to offer cost competitive solution and technology leading solution and we believe we have that and we have significant number of customers who are already delivering a large number of handsets based on our solution to the marketplace. So I think that we are well on our way. Clearly, we are working very hard to win more accounts so we can get to our target of 50%.

Okay. Great, thanks.

Our next question comes from line of Mike Walkley from Piper Jaffray. Please proceed with your question.

Great, thanks. With your doubling your WCDMA chipset units and also starting to sound like you are doing a little more rationalization on R&D, can you help us think maybe a little more longer term, with this year being your investment year in the chipset business, what metrics we should look for to maybe get back to 30% operating margins in QCT?

For my long-term guidance in terms of our profitability at QCT has been that we drive our business to between 25 and 32% of the -- of operating margin. The guidance for operating margin for this year that we provided back in November was 26 to 27%. As of right now, we expect that we will hit somewhere between 25 and 26% operating profit margin for the whole year. So for next year, again, I think we will fall somewhere in the 25 to 32 range. It will depend what our margin is, again, will depend a lot on the mix of products that we ship. If wideband CDMA products were particularly successful, I suspect that our operating margin would be higher.

EV-DO has certainly been extremely successful and Sprint and Verizon and VIVO driving EV-DO, we are hopeful that we will have good shipment of EV-DO chips in the next fiscal year. So on top of that, I think our ability to leverage R&D across both EV-DO and wideband CDMA is another very significant factor in thinking about our operating margin.

Thank you.

Our next question comes from the line of Tim Luke at Lehman Brothers. Please proceed with your question.

Thanks. Sanjay, I was wondering with respect to last quarter you said your visibility was building for the September period. And indeed it seems that you are reiterating a fairly healthy uptick in your September quarter units. I was wondering how you perceive your book-to-bill visibility as you start looking at the December period.

I was also wondering for Bill or Paul, it looked like the -- the ASP in March went up fairly materially versus what one had expected. And I was wondering whether you might have been able to help us with how we should sort of frame WCDMA in the March period and June period as -- as a range in that Japan looked like it was strong.

And more broadly, Paul, I was wondering if you could give us a sense of how you feel Japanese number portability may impact your growth there later in the year or when it might have an impact. Thanks.

Tim, taking the question on our visibility into December quarter. We so far have not provided any guidance on the December quarter. All I can say is that the September quarter, we have certainly seen a marked improvement in our book-to-bill. We don't break that number out for you.

For the December quarter, I think I -- I'll give you two or three qualitative factors which may weigh on our shipment. One is Sprint and Verizon rolling out EV-DO and how successful and how aggressive they are in doing so. Secondly, how successful and aggressive European carriers are in wideband CDMA deployment in the December quarter. As I indicated, we see the second half being more positive for wideband shipment. So I think those two factors will be important in considering how our December quarter plays out.

Tim, this is Bill. On your ASP question. Yes, we had a very nice result with last quarter ASP going to 231. I will note, Tim, that if the Japan WCDMA shipments hadn't been as strong as they were, we would have been within a few dollars of our -- of our original guidance in the 215 range.

So -- and then the -- the driver behind the -- the 215 forecast for the September quarter, again, that -- that relates to June shipments. I think as you mentioned. What I see happening there is North America sequentially up. China sequentially up. India sequentially up. But I see Japan sequentially down and South Korea sequentially down.

Thanks.

In terms of the number portability, I guess we have seen in any market, as number portability has come online, we have seen increased churn and therefore increased handset sales. In Japan, in particular, given the high wholesale prices for the handsets, that would be definitely a positive for us.

Just, Paul or Steve maybe, on the China deals that you just signed, are they sort of all domestic shipments as well as export shipments? And then if you want to comment on the flurry of lawsuits of late and whether we should expect more.

Yes, the license agreement that I referred to earlier are all worldwide agreements. So wherever they manufacture and sell their license to do so. And in terms of lawsuits, I -- I guess, my way of looking at it is when you -- when you have a successful business and you are in a very growing and exciting marketplace, I think those kind of things are sometimes unfortunately a matter of doing business. So we'll deal with them from time to time.

One outcome of the lawsuit that's probably surprised people is the strength of our patent position in technologies outside of CDMA.

Next question comes from the line of Apjit Walia at RBC Capital Markets. Please proceed with your question.

Just quickly on India. I know you just commented you're going to see some sort of growth. Could you give a little bit of color what kind of growth you could see and what vendors. And also can you give a little bit of comment on the litigation with Broadcom.

So in India, some of the interesting things we are seeing, DSNL [ph] is extending, CDMA for rural rollouts, that should help out. Looks like Reliance, the management transition there -- it looks like it's settling down. And Tata, interesting potential there as well, done a little management changeover, they have brought in some other people. In all, I think we are well-positioned, but also there are some handsets coming into the market at very low prices. I think we have done a good job in terms of driving the handset price at the very low end, and those handsets are extremely competitive, so that should help as well.

In terms of the Broadcom litigation. I am not sure what I can add that we already haven't publicly disclosed in our press releases. It's a patent infringement case that they have asserted against our products. They have brought a antitrust case more recently. We filed a patent case back against them, and we are at -- all at a very early stage, and it will have to play out.

Great, thank you.

Our next question comes from the line of Ehud Gelblum at J.P. Morgan. Please proceed with your question.

Thank you very much. A couple quick questions. First of all, Steve, in some of the other comments that either yourself or Bill Keitel said, I think you were talking about how you found that your patent portfolio extends to a lot more than just CDMA-types of technologies, and you mentioned in many others including GSM and GPRS. Off of a lark, does this mean that all of a sudden you're going to start trying to license some GSM vendors. That's just kind of an aside question, but curious to see if that's kind of the strategy you have had in the back of your mind the last 12 years, but now, Steve, that you are President, you can actually attack that.

One of the -- the issues that Broadcom does bring up in the antitrust suit, which is something I had not been familiar with, was in the sense tying whether a handset vendor purchases chips from you with the royalty that you end up charging them, which is something I didn't -- didn't think you did, but obviously don't know. Are there -- in all of your -- your royalties and your agreements that you sign with everyone, are they all pretty much done completely at hand's length from QCT irrespective of whether they actually purchase chips from you?

I am not going to get into details of our license agreements, but I will say absolutely they are done without QCT's involvement. It's a QTL business unit that is responsible for that. And, the -- the types of agreements we have entered into I think we -- we've been very reasonable and fair and I am very comfortable that they're in compliance with all legal requirements.

In terms of were we going to announce that we have patents that apply to GPRS and EDGE, in terms of our plans for that, in this case we have used it as sort of a defensive mechanism. Broadcom started this and so we fought back.

In terms of where we go forward, these are value -- this is a valuable portfolio. We are committed to licensing that portfolio on reasonable terms, free from unfair discrimination and in compliance with our standards commitments. And so it is too early to say at this point how that will all come out, but we do have a very valuable portfolio there we believe.

In terms of the time frame over which he has been itching to do this, let me just say that a lot of these -- this ITR was generated as the GSM systems added data capabilities to their systems and they had to adopt techniques that we originally developed for CDMA, so this is more recent development, I guess I would put it.

Okay. If I can add one other thing in terms of the new handset numbers we have for the year. It looks like by your own guidance, the March shipments for handsets exceeded what you had been looking for, the 43 million. You were looking for 40 to 42 million. And it looks like we will see nice strong shipments again in June that kind of inform your royalties in September, but yet for the full calendar year you brought the midpoint down for full wideband CDMA shipments down by 10 million. So, putting those two things together, stronger first half of the year, lower number for the full year. How has your thought process changed in terms of the back half of the year? Should we see a little bit more slowing in the back half of the year? That's kind of what the extrapolation is from those two pieces, I just want to make sure I am understanding correctly and why.

Ehud, it is Bill Keitel. There's two primary factors bringing the handset guidance down. One is WCDMA in Western Europe and two is CDMA2000 in China. In the case of China, we have seen change in management, rumors of -- of maybe some further organizational changes, as well as you got the question on 3G licenses, not only for us but for operators there. And all those things combined we think have slowed down the China market, and we are recognizing that in our guidance.

Having said that, we expect the China market to be a bit better in the second half of calendar '05 relative to the first half, and the market as a whole. CDMA and WCDMA combined, we expect to be stronger in the second half than the first half, and -- and notably WCDMA, although we brought it down, we are still looking for a healthy rate of growth here over the next couple of quarters.

Great, thank you.

Our next question comes from the line of John Bucher at Harris Nesbitt. Please proceed with your question.

You don't provide WCDMA unit numbers, but I am wondering if you can just talk about the progression you have seen in units since the -- since the end of calendar 2004. If you can just talk about the progression you have seen on a quarter-by-quarter basis. And to the extent that you are willing to do so, how you see it just in terms of order of magnitude in the second half of this calendar year. Thank you.

John, this is Sanjay. I take it that your question is related to wideband CDMA chipsets.

Actually it is not, it's WCDMA handsets.

Okay, John. This is Bill Keitel, we've seen a fairly steady increase in units here as -- as we have gone along here every quarter of the -- since WCDMA really started in volume. I expect a further increase in the June quarter, which would be our September quarter revenues, and -- and we expect the two quarters after that to be sequential increases as well.

And we are seeing seasonality also, and we saw some reasonable bump-ups in the Christmas selling season as you might expect because that's when the operators push hard. And so we expect to see that happening again this year.

Not to slight Sanjay, but will that match what you are seeing in terms of chipset unit shipments also then?

Yes, John. The -- the first calendar quarter to second calendar quarter we saw a doubling, and then actually from the first fiscal quarter to first calendar quarter, we also saw doubling of our volume shipment. And we actually anticipate sequential increases in our volume shipment going forward.

But I would add that Sanjay's rate of growth is at a higher rate right now for the next couple of quarters than what we see the WCDMA industry as a whole.

Thank you very much.

Thank you. That was our final question. Dr. Jacobs, I will turn the conference back over to you.

I just wanted to end today's call by saying that we really feel that the opportunities for QUALCOMM are even greater now than they ever have been, and I am very grateful for the chance to work with an incredible group of employees and with all of our partners. I feel like the Company has gotten to where it is by innovation and by trying to figure out when something is going on what is it that everybody else is missing, and we find a better way to do those. We execute very well on those opportunities, and that's allowed us to make the major impact that we have in wireless telecommunication throughout the world.

So I'm very excited and very optimistic that we will continue to help lead the industry and do this working very closely with our partners and our customers, and most importantly, with our employees. So thanks, everybody, for attending the call today.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your lines. Thank you and have a good day.